From 1 March 2016 the taxation of pension, provident and retirement annuity funds is simplified and harmonised – but what does this mean?
The simplification and harmonisation means that an employee can get a tax deduction from his/her total remuneration or taxable income (whichever is greater) of 27,5% (up from 20%). The tax deduction is limited to a maximum contribution of R350 000 per annum across all retirement vehicles. This is substantially more than previous allowances and should encourage greater savings without affecting the net take-home pay for the employee. Even if the contribution is made by the employer or the employee, the employee will be allowed the tax deduction. Any excess over the R350 000 limitation in a given year can be carried forward to the new tax year and the tax benefit can be claimed. It is important to note that the 27.5% limit and R350 000 annual cap applies to the total amount of all contributions to retirement funds to which the member may belong i.e. pension, provident and retirement annuity funds. The immediate effect of this is that after T-Day provident fund members will enjoy tax deductibility on their own contributions. This now aligns the tax deductibility of Provident Fund member contributions with those of Pension Funds.
The great thing about the new law is that there is no need to change Retirement Fund rules to change employer contributions to employee contributions because the deductibility is sorted out at payroll.
I have heard that the new law caters for “annuitisation” – what does this mean?
“Annuitisation” means only 1/3rd of the retirement benefit may be taken in cash on retirement and 2/3rds must buy a pension. This means that instead of receiving a cash lump sum the member will receive a regular income (usually monthly) for life. This annuitisation law only applies to retirement values that are more than R247 500. The full value may be taken in cash at retirement as long as the value is below R247 500 (previously R75 000) at retirement. General workers have misunderstood this new annuitisation law and tried to ‘cash in’ their provident funds in order to get their saved retirement funds. It is important to understand that this law does not apply to retirement funds pre March 2016 and only to retirement funds in the future and on retirement. It also does not apply to benefit on leaving service for reasons other than retirement (i.e. annuitisation does not apply on leaving service prior to normal retirement age). Annuitisation will also not affect members already 55 at 1 March 2016 and who retire from the same fund thereafter. What if an employee has other savings in other retirement funds like retirement annuities? The R247 500 (which is referred to in the industry as the de minimis amount) applies to each fund as a separate entity (i.e. per fund).
But can I transfer my retirement funds to another fund?
Yes, fund contributions and the growth in those funds (called vested rights) can be transferred to any approved funds and including Retirement Annuity (RA) Funds. In addition, tax free transfers will be allowed from pension funds to provident funds. However, if a member is already 55 at 1 March 2016 and transfers to another fund, the new contributions after the transfer will be subject to annuitisation. Retirement annuity funds will still only be allowed to transfer to other RA funds i.e. an RA fund cannot transfer to a pension or provident fund.
What if I want to cash in my retirement funds?
Yes you can still take your benefit in cash on provident funds as there is no change to this right prior to retirement. There is no change to cashing of RA’s that are currently only available on formal emigration. There is also a new provision that will apply to ex pat members returning to a country of residence.
Are we better off with the retirement fund changes?
One small amendment to the retirement fund rules will be to allow members to voluntarily contribute a higher amount than the specific contribution categories specified in the rules of the fund. This will be known as AVC’s and a member can contribute any additional amount up to the specified limits.
The government is trying to help members by simplifying the rules, making the tax treatment fair for all retirement vehicles, encouraging savings through retirement funds by using tax concessions, and ensuring members get an income after retiring.
Employees will still be able to choose the type of annuity and the provider when they retire.
Lastly, employers will still be able to control the benefit structures of their employees and employees will still have the same access to their retirement funds saved up to 1 March 2016.
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